Corporate Fraud, Governance and Auditing
AbstractWe analyze corporate fraud in a model where managers have superior information but, due to private benefits from empire building, are biased against liquidation. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To restrain fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking into account external corporate governance and auditing regulation. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and managerial incentive pay are used, worse external governance must be balanced by heavier reliance on both of these incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while options worsen them.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 203.
Date of creation: 01 Sep 2008
Date of revision: 26 Apr 2012
Publication status: Published in the Review of Corporate Finance Studies, 2012, 1(1), pp. 109-133.
accounting fraud; auditing; managerial compensation; corporate governance; regulation;
Other versions of this item:
- Marco Pagano & Giovanni Immordino, 2009. "Corporate Fraud, Governance and Auditing," EIEF Working Papers Series 0909, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2009.
- Immordino, Giovanni & Pagano, Marco, 2008. "Corporate Fraud, Governance and Auditing," CEPR Discussion Papers 7104, C.E.P.R. Discussion Papers.
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- M42 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Auditing
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-09-29 (Accounting & Auditing)
- NEP-ALL-2008-09-29 (All new papers)
- NEP-BEC-2008-09-29 (Business Economics)
- NEP-CTA-2008-09-29 (Contract Theory & Applications)
- NEP-LAW-2008-09-29 (Law & Economics)
- NEP-REG-2008-09-29 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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